I think the game represents quite nicely how most of the people in an orwellian-like dictatorship would look like. They are weary and depressed from the fear of the regime and the police. They can be arrested any time for no reason. Except of course in Arztozka because that's the best!

I think that's quite an exageration on both fronts - unless your standards for being intelligent (or atleast average/ not an idiot ) and good looking/average looking are set to some theoretical space level.

Anyway, about the people in the game - I don't think you have to take it so literal, yes, a lot of them look ugly, this is an -intentional- design choice, just like all of the game's visuals.

Haven't you noticed that all the colours are washed out and depressing ? Your intercom voice is this creepy, garbled sound, it's all supposed to fit in with the dark, opressive theme. If people would look OK - then it would mess with the immersion somewhat, they wouldn't be fitting in.